April 10, 2009

April 10, 2009 | Commentary on Agriculture, Taxes

Farmer Bailouts Must be Revised

Megabillion-dollar bailouts are in today's headlines. But let's not forget the longest-running bailout of all - the roughly $25 billion subsidy showered annually on just some of America's farmers.

These are Depression-era programs. Born in the 1930s, they've long outlived their justification. But hey, who can say no to $25 billion?

The farm subsidies mostly reward households that don't need a handout. The average farm household pulls in more than $80,000 each year in sales and taxpayer subsidies, and has a net worth of more than $800,000.

Moreover, farm program money is based on crop acreage, so the lion's share of money doesn't go to hardscrabble farmers with broken fingernails. It goes to mammoth agribusinesses, some of which are even subsidiaries of insurance companies and energy conglomerates.

And virtually all the subsidies go to producers of just five crops - wheat, cotton, corn, soybeans and rice. These farm businesses claim they need billions to survive. Odd how those producing oranges, vegetables, chickens and other foods can manage to get their goods to your supermarket with little or no money from taxpayers.

The argument for farm programs is not that farmers are actually poor. It's that farm income fluctuates widely, largely because of the weather. Bad weather batters farm family income some years. Yet bumper crops can often be a problem, too. We don't double our food consumption if total corn or cauliflower output doubles. Instead, oversupply drives down prices and farm income.

Congress bought this argument (and keeps on buying it, year after year - with your money). Their response: An intricate and expensive set of bureaucratic programs. They pay farmers to grow on some land. Pay them not to grow on other land. Pay them to grow certain crops. Pay them not to grow others. And provide "insurance" that always seems to be paying out - mainly to people who don't really need the money.

There's got to be a better way, right? Indeed there is, and it's the financial equivalent of what biblical Joseph came up with in Egypt more than 3,000 years ago. He figured out that in the years of plenty it makes sense to put something aside to cover the lean years.

Well, a number of people reckon that if that worked for the Egyptians it would probably work for us, and at a fraction of what farm subsidies cost us.

Today's version is usually called a farm savings account. It's a bit like a health savings account or an IRA. Rather than have the government build grain warehouses, as Joseph did, it would create financial "warehouses."

It works like this: During financial "years of plenty," farmers could make tax-deferred contributions to a special account administered by the Department of Agriculture. There would be a maximum level of annual contribution, perhaps 20 to 25 percent of annual farm-related income, and perhaps a maximum balance for a farmer's account. But the contribution limit would be far higher than under today's IRA or 401(k) accounts.

Farmers could then draw from these accounts if their annual income fell below, say, 80 percent of their three-year average income, perhaps because bad weather reduced their earnings. In this way they could even out their income without costly and complicated bureaucratic farm programs.

While contributions would be deducted from taxable income, taxes would be paid on withdrawals, just like IRAs.

The government would pay interest on the balances in the accounts and the cost of managing the accounts. But in its purest form, the "payouts" and the contributions would come from farmers, not taxpayers. (Some versions do envision the government providing a match for some level of deposits, to induce farmers to take part).

Most proponents see the accounts as being available to all farmers, not just those growing corn and other commodity crops. And they see them as replacing all or part of the existing web of programs.

While Joseph may have come up with the basic idea, several countries far from Egyptian climes have latched onto it in modern times. Canada created a version in 1991. Australia launched another in 1999.

Several bipartisan farm savings accounts bills have been introduced in Congress as well. They include a bill co-sponsored by Reps. Ron Kind, Wisconsin Democrat, and Jeff Flake, Arizona Republican, another co-sponsored by Sens. Frank R. Lautenberg, New Jersey Democrat, and Richard G. Lugar, Indiana Republican, and a bill by Sen. Jeff Sessions, Alabama Republican.

Washington these days seems to be on a perpetual hunt for new ways to solve old problems. But if Congress really wants to fix the farm bailout system, it couldn't do much better than revamp Joseph's 3,000 year-old success story.

Stuart Butler is vice president for domestic policy issues for the Heritage Foundation.

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First appeared in the Washington Times